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Funding Issues in TANF Reauthorization

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The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 replaced the nation's basic cash assistance program for poor families with the Temporary Assistance for Needy Families (TANF) block grant. Since 1997, states have received $16.5 billion annually through the TANF block grant. States were required to spend roughly $10.5 billion in state resources to meet their "maintenance-of-effort" (MOE) requirement and qualify for these federal TANF funds.

The TANF block grant allows states to allocate resources to a broad array of services that promote the four purposes of the TANF statute: assisting needy families so children may be cared for at home, ending dependence of needy families on government benefits by promoting work and marriage, reducing nonmarital pregnancies, and encouraging the formation and maintenance of two-parent families. [2] As the number of families with children receiving basic cash assistance fell, states increasingly devoted TANF block grant funds to supports for low-income working families, such as child care, to more intensive employment efforts to help families that have not yet made the transition to work, and to efforts to meet the law's "family formation" goals, such as reducing teen pregnancy.

The remainder of this section discusses the issues that arise from the current-law funding structure, namely (1) the fixed funding level of the block grant, (2) the large disparities in block grant allocations among states, and (3) the lack of a mechanism to provide additional resources to states during recessions. The next section of this paper discusses how states have used their TANF funds over the past five years. A discussion of reauthorization proposals then follows. The appendix provides an overview of the current TANF funding mechanisms for readers with less familiarity with the program.[3]

The Effects of Inflation on the TANF Block Grant

Because the TANF block grant has been funded at a fixed level that is not adjusted for inflation, its inflation-adjusted value fell by more than 11 percent between fiscal year 1997 and fiscal year 2002. At the same time, cash assistance caseloads fell each year between fiscal year 1997 and fiscal year 2001 in nearly all states, freeing up resources to devote to non-cash assistance purposes, such as welfare-to-work efforts or supports for low-income working families.[4] Because cash assistance caseloads fell rapidly and states needed time to adjust to the flexibility the TANF block grant afforded them, many states initially accumulated "TANF reserves" — unspent TANF funds that could be spent by states in subsequent years. States have used these reserves in more recent years to expand their non-cash-assistance TANF programs. For these reasons, the decline in the value of the block grant, adjusting for inflation, generally has not posed serious problems for states during the first five years of TANF implementation.

The situation has now changed markedly, however. Further erosion in the inflation-adjusted value of the TANF block grant likely would force many additional states to scale back their current efforts to provide supports, such as child care, for low-income working families and to help parents still receiving cash assistance prepare for and find jobs.

In response to the current recession, cash assistance caseloads in many states now are rising, not falling. Data collected by the Center for Law and Social Policy indicates that cash assistance caseloads rose in 33 states between March and September 2001. If assistance caseloads continue to rise, states will need moreresources to pay for basic cash aid. This contrasts with the experience of the past five years in which cash assistance caseloads fell and states were able to use the resources freed up by those falling caseloads to fund a richer array of services. Even if the economy recovers, it is unlikely that caseloads will fall below their lowest levels for a considerable period of time. Research by Professor Rebecca Blank of the University of Michigan shows that in the last recession, welfare caseloads remained elevated above pre-recession levels for two year after state unemployment rates returned to pre-recession levels. [5]

Most states will not be able to rely on TANF reserves to augment their annual block grant allocations in future years. Data from the Treasury Department indicate that TANF spending by states totaled $18.5 billion in fiscal year 2001 — about $2 billion more than the annual TANF block grant, indicating that many states used their unspent TANF reserves to supplement their fiscal year 2001 TANF block grant allocations. While final data from HHS are not yet available, it is likely that state TANF reserves fell in fiscal year 2001. TANF reserves are likely to fall further in fiscal year 2002, as states draw on them both to continue funding programs at or near their fiscal year 2001 levels and to meet the increased costs associated with the recession. States currently spending in excess of their block grant allocation will have to scale back funding of some initiatives as they exhaust their reserves unless additional resources are made available to states in TANF reauthorization legislation. If the block grant continues to fall in inflation-adjusted terms at the same time that states exhaust their TANF reserves, states will have to make even deeper cuts over time. Furthermore, some states never accumulated substantial TANF reserves; these states also will not have reserves from which they can draw to dampen the impact of further erosion in the inflation-adjusted value of the block grant.

During the upcoming state legislative sessions, many states will be considering how rising cash assistance caseloads will affect their ability to maintain other TANf-funded efforts, such as welfare-to-work efforts or supports for low-income working families. Just last week Montana, faced with a caseload increase of about 20 percent in the last year, shifted $9 million in federal TANF funds from 21 work support programs to cash assistance because the similar $9 million shift it made a few months ago proved insufficient. The work support programs — including job training, mental health services, and housing and transportation assistance — have now seen their $26 million budget reduced by nearly 70 percent. [6]

How Does Inflation Affect the Cost of Providing Services and Meeting Welfare Reform Goals?

If TANF reauthorization legislation continues to provide states with TANF funding that does not adjust for inflation, by 2007, the inflation-adjusted value of the block grant will be 14 percent lower than in fiscal year 2001 and 22 percent below its value in 1997. Because the cost of providing child care, employment and training services, and transportation assistance rises over time with inflation, a reduction in purchasing power of this magnitude will make it difficult for states to maintain their current welfare reform efforts.

A significant portion of the cost of providing these services is attributable to personnel. Since the salaries of child care workers or individuals who provide education and training services cannot be frozen over the next five years, the cost of providing these services will necessarily rise. Thus, if TANF block grant funding remains frozen thereby continuing to erode with inflation, states will be able to afford fewer child care or employment-services slots. Yet, the success of welfare reform efforts depends on states' ability to purchase such services.

States also need additional resources to address some of the still-unmet needs of low-income families. While cash assistance caseloads fell by roughly 50 percent between 1995 and 2000, the number of children in poverty fell by 22 percent, a much smaller reduction. [7] Part of the explanation for this difference is that families who leave welfare often remain poor. Studies of families that have left welfare indicate that about 60 percent of former cash assistance recipients are working, with a larger share having reported working at some point since leaving TANF. The wages of these former recipients are low — studies of former recipients from around the country indicate that wages tend to average between $6 and $8.50 per hour. [8]

In addition, Census data show that the poorest 700,000 single-mothers living only with their children 1999 had less income — when earnings, the earned income tax credit, and benefits such as cash assistance and food stamps are taken into account — than similar women in 1995, even though their earnings increased. This trend suggests that while the combination of a strong economy, state welfare reform efforts, and strengthened work supports (such as the earned income tax credit) increased the total number of single mothers who were working and led to reductions in child poverty, the lowest-income single-mother families became poorer.[9] Recent findings based on evaluations of welfare to work programs that pre-dated TANF, show that with regard to outcomes for children, total income matters. Programs that increased earnings, but in which incomes did not increase because benefit losses offset earnings gains, did not show clear positive impacts on children. In contrast, programs that increased incomes as well as earnings showed positive effects on children's school achievement and behavior.[10]

The programs needed to address lingering poverty, to continue moving welfare recipients into the workforce, and to help low-income working families secure jobs that pay above-poverty wages are likely to be more costly than programs already in place. For example, research has shown that many parents receiving cash assistance have substantial barriers to employment — such as physical or mental health impairments, substance abuse problems, limited English proficiency, or very low basic skill levels — and that parents with such barriers have difficulty finding and retaining employment. [11] To help such parents secure stable jobs, states will need to invest additional resources in welfare-to-work programs that provide intensive services to help families overcome such barriers. Similarly, if states are to make further progress in providing supports for low-income working families — including child care subsidies, earnings supplements, transportation assistance, and help in gaining skills so parents can secure employment that pays above-poverty wages — additional resources in these areas will be needed.

Finally, there is interest among some state and federal policymakers for states to do more to meet the "family formation" goals of TANF. States could undertake a range of activities to further these goals. For example, states could provide employment and parenting services to non-resident parents to increase the child support they pay and their involvement with their children. If the state also distributed a greater portion of child support payments directly to low-income children, rather than retaining those payments to offset TANF costs, the financial well-being of children could be improved. Similarly, states could use TANF resources to redouble efforts to reduce nonmarital childbearing. Any initiatives in this area, however, will require additional resources.

Very Low TANF Block Grant Allocations in Some States Hinder Welfare Reform Efforts

While it is important for TANF reauthorization legislation to ensure that the TANF block grant does not erode further in value, some states receive such low block grant allocations that they have been unable to fund adequate efforts to help parents find employment and to provide supports for those that do. The TANF block grant is allocated among states based on historical spending in the Aid to Families with Dependent Children (AFDC) program. Spending in that program varied greatly among states, in large measure based on the differences in cash assistance benefit levels set by states. Therefore, states with low cash benefit levels received far less in federal AFDC resources on a per-poor-child basis than states that set higher benefit levels.

A state's block grant allocation can be measured relative to its needy population by dividing the state's block grant by the number of poor children in the state.[12] In fiscal year 2001, eight states received less than $600 in block grant funding per-poor-child, while 12 states received more than $1,600 on that basis. The national average block grant allocation per poor child was roughly $1,200. These figures include additional TANF funds provided in "supplemental grants" that went to 17 states. These grants were designed, in large part, to ameliorate these very substantial disparities among states. The supplemental grants, which totaled $319 million in fiscal year 2001, were authorized only through fiscal year 2001, however. States will not receive these grants for the current fiscal year unless Congress approves legislation to extend them for fiscal year 2002.[13] (It should be noted that several states that received supplemental grants qualified based on high population growth not based on a low per-poor-child allocation.)

Under the AFDC program, the bulk of state spending was on cash assistance benefits. Many poor states chose to have very low cash assistance benefit levels. These benefit levels reflected, in part, differences in the cost of living in poor states such as Alabama, Mississippi, Arkansas, or Texas as compared to wealthier states such as New York, Massachusetts, California, or Illinois and, in part, state policy decisions about the level of cash benefits to provide. Under TANF, states still provide basic cash assistance to families, but a large portion of the block grant is used to fund work programs designed to help parents find and retain jobs and to provide work supports such as child care. The cost of these employment services vary among states far less than do the TANF block grant allocations on a per-poor-child basis. For example, salaries for child care workers and job trainers in a state such as Texas are not 80 percent lower than the salaries of such individuals in Maryland. Yet the per-poor-child block grant allocation in Texas is 80 percent lower than the allocation in Maryland. If states with very low block grant allocations are to be expected to help families move from welfare to work and to help support low-income working families, they will need additional resources to do so.

TANF Funding During Recessions

The 1996 welfare law included a "contingency fund" that was supposed to provide states with increased resources during economic downturns. The contingency fund expired in fiscal year 2001 and the design of the fund was so flawed that even if it were still authorized, it is unlikely that any state would be able to access it during the current recession.

During a recession, the number of poor families needing basic cash assistance increases. Between March and September 2001, 33 states reported increased cash assistance caseloads. The purpose of the contingency fund was to ensure that both the federal and state governments shared in the risk of such cost increases. Without a contingency fund, a state facing rising need for basic assistance and a fixed block grant allocation would have few choices. It could increase state funding for welfare programs, but that is very difficult for states to do during a recession when state revenues are falling and budgets must be balanced. Alternatively, such a state could reduce spending on efforts such as child care and work programs and direct those funds to basic cash assistance or it could restrict the number of families that receive basic cash assistance. Finally, if the state has unspent TANF reserves, it could draw upon those reserves. During this recession, it is likely that some states will use unspent TANF reserves to meet increased costs, but other states do not have substantial reserves to fall back upon.

A workable contingency fund is necessary to ensure that states can meet the needs of families affected by a recession without curtailing important welfare-to-work initiatives or supports for working families. Moreover, if states do not have access to additional TANF funding during recessions, some states may choose to save too large a portion of their current TANF funds during good economic times to protect them should a recession arise. While states should save some resources for a "rainy day," if states save too large a share of their funds, they will not have the resources needed on an on-going basis to meet important welfare reform goals.

[2] One significant exception is that TANF restricted immigrants' eligibility for benefits, which is discussed in detail in Shawn Fremstad, Immigrants and Welfare Reauthorization, Center on Budget and Policy Priorities, January, 2002.

[3] This paper does not address all the TANF recommendations that would require funding, nor the appropriate funding level for programs closely related to TANF, but instead focuses on TANF's funding structure.

[4] Cash assistance caseloads began to increase in many states toward the end of 2001 due to the recession.

[6] See Bob Anez, Growing Welfare Caseloads Siphons More Money from Other Programs, The Associated Press State and Local Wire, January 17, 2002.

[7] The figure cited here on the reduction of the number of children in poverty considers a child poor if his or her family's income excluding means-tested benefits such as TANF cash assistance or food stamps falls below the poverty level.

[11] See Heidi Goldberg, Improving TANF Program Outcomes for Families with Barriers to Employment, Center on Budget and Policy Priorities, January, 2002.

[12] This is only one way to measure a state's block grant allocation relative to its needy population. For example, given the broad purposes of TANF, one could measure the block grant relative to the number of children below 200 percent of the poverty level.

[13] The Senate passed a bill to extend the supplemental grants for fiscal year 2002. This bill did not include any provisions other than the extension of the supplemental grants. The House has not acted on the Senate-passed bill, but a provision to extend these grants was included in the House-passed economic stimulus bill which was approved in December of last year but did not pass in the Senate.